When and How Are Analysts’ Price Targets and Recommendations Useful?

Abstract

This article addresses the questions of when are outstanding price targets and recommendations most useful for investors, and how should investors interpret inconsistent price targets and recommendations? There are four key conclusions. First, recommendations pertain more to the quality of a stock, while price targets pertain more to the valuation of a stock. Second, price targets are more useful than recommendations for forecasting returns. Third, high price targets are most predictive of returns when they are accompanied by unfavorable recommendations. And fourth, investors who use price targets and recommendations in their investment process may benefit from also incorporating individual analyst data.